Geithner: Ending too-big-to-fail is ‘like Moby Dick for economists’

The early buzz around Timothy Geithner’s new book is lingering on the former Treasury Secretary’s uneasy relationship with the so-called too-big-to-fail banks.

Geithner, whose memoir goes on sale Monday, had a front-row view to the financial crisis, having served as President of the New York Federal Reserve Bank in 2008, and then as head of the Treasury Department when President Obama took office at the height of the crisis.

Bloomberg

Timothy Geithner

In the latter role, he became somewhat of a face of the federal government’s efforts to save the banking system — and then reform it. For that reason, his legacy remains decidedly mixed. Now, after a full year away from the government, Geithner’s talking about what it was like when it looked like the banking system was going belly up.

A New York Times magazine story by Andrew Ross Sorkin gave a peek into the thinking that went into Geithner’s book, and much of it focuses on defending his legacy. But while his reflections cover the full spectrum of personal (he didn’t actually want the Treasury job) and professional (He clashed with other top administration officials about whether to save Lehman Brothers), the too-big-to-fail issue remains a focal point.

Here’s the salient passage from the Times story, in which Geithner appears to make an about-face on his view of whether too-big-to-fail can actually be eradicated:

“For much of the past five years, Geithner has publicly been fighting with the idea of too-big-to-fail, which implies that executives at the top banks were willing to take on remarkable risks because they knew that the government would ultimately bail them out, given the devastation their collapse would bring. Geithner and Obama marketed the Dodd-Frank bill as a way to end future bailouts. In 2010, right before the bill passed, Geithner said, ‘The reforms will end too-big-to-fail.’ Obama went further: ‘Because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more tax-funded bailouts, period.’

“But it is now clear that Geithner never believed his own talking points. To him, too-big-to-fail and the so-called moral hazard, or safety net, that it would create can’t really ever be fully taken away. During his lecture to [Larry] Summers’s class, one student asked a question about ‘resolution authority,’ a provision of the reform laws that is supposed to let the government wind down a complex financial institution without creating a domino effect. The question prompted Geithner onto a tangent about too-big-to-fail. “Does it still exist?” he said. ‘Yeah, of course it does.’ Ending too-big-to-fail was ‘like Moby-Dick for economists or regulators. It’s not just quixotic, it’s misguided.’

For many, this remains one of the key issues left unaddressed by the financial crisis. Here’s what folks on Twitter had to say about it:

And more broadly, the book serves as a reminder that the scars of the financial crisis haven’t fully healed: